Restraint on executive pay prevails

Despite the recovery, remcos are following the “spirit of the law” and not just “observing the letter of the law”

By Michelle Perry | Published 14:40, 02 April 14

Business secretary Vince Cable may have to step back from his most recent warnings to “act responsibly” on executive pay, and withdraw his threats for more regulation ahead of this year’s round of annual general meetings.

The latest analysis from PwC shows that chairman of remuneration committees at the UK’s top companies have indeed heeded the warnings and are exercising restraint.

PwC analysis of early reporting shows that FTSE 100 executives have seen their bonuses fall for the third year in a row. And nearly a quarter have had their basic pay frozen.

So far, CEOs’ average bonus pay-outs for 2013 were £1.14 million, on average 1 percent lower than 2012 despite the economic recovery strengthening and a 10 percent rise in the FTSE100 index in 2013.

“Executives are seeing only modest salary increases and bonuses continue to fall. Remuneration committees are approaching any increase in pay-outs with caution to ensure they accurately reflect performance and satisfy shareholders,” Tom Gosling, head of PwC’s reward practice, says.

Last year Cable was criticised in some quarters for watering down proposals on the binding vote for shareholders on executive pay. So his recent counsel to chairman of pay committees could be viewed a verbal concession to those critics.

A spokeswoman for the Department for Business, Innovation and Skills told me that the new rules on executive pay were an attempt to “get the balance right” and not over-regulate. But as there was pressure to go further to tighten the rules, the business secretary clearly wanted to remind corporates of his clout should restraint on pay not be exercised this year.

Last week Cable – although he may not be in office after the next election – warned companies that he still has measures available to him, such as the requirement to consult employees.

This particular suggestion has rattled some. Danny Blum, partner and employee incentives expert at law firm Eversheds, says government’s messages are “confusing”.

“The suggestion that there should be enhanced consultation with employees is bizarre.”

He too has a warning for Cable: “If the government’s agenda is to restrict relative pay within an organisation this should be made clearer and many will question whether, in a free economy, it is the government’s role to pursue this agenda.”

Maybe Cable, or his successor, won’t have to go further however. PwC’s research shows tighter controls over pay will prevail for the next five years with 60 percent of the FTSE 100 anticipating pay to be within 10 percent of current levels.

Yet, the risk remains that as soon as the recovery is fully established and the good times return, links between pay and performance will be forgotten, or at least overlooked again.

With that in mind, it’s no bad thing for chairmen of remcos to be reminded there are still measures available should spiralling executive pay that has no obvious link to a company’s performance return to these shores. For now however, it seems it’s enough for shareholders and remcos to continue to fulfil their duties as corporate citizens, without further recourse to legislation.

Gosling is more optimistic than me. “It seems less and less likely that executive pay inflation will return to the levels seen before the financial crisis.”

Let’s hope he’s right.

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